Are Esops Feeble?

Hyatt-Clark Industries Inc. filed for Chapter 11 protection last January, but its misfortune didn't prove that employee equity is a bankrupt idea.

In 1981, the ball-bearings maker became America's largest employee-owned company. But the move didn't bring harmony. The 1,100 owner-employees bickered constantly with management and even staged a slowdown. "They had difficulty understanding that anytime you act in a negative way, you are acting against yourself," says Douglas Fraser, retired president of the United Auto Workers and a company director.

Despite this prominent casualty, the number of employee stock ownership plans will increase more rapidly in the years ahead. Joseph Blasi, a lecturer in social studies at Harvard University, estimates that more than 10% of workers will toil in companies that are at least 15% employee-owned within 50 years -- a level of ownership that may give them real influence. Most existing ESOPs cover ownership of far less than 15%.

The majority of ESOPs with more than 15% ownership occur in small companies in which owners have no successors and want to leave the business in trusted hands. Business owners are also attracted by the tax advantages of selling to employees; the number of ESOPs soared after tax breaks were passed in 1984.

The plans are common in deregulated industries like trucking and airlines, where competitive pressures force labor to accept concessions in return for equity. Blasi predicts that the next wave of ESOPs will be in banking. And the United Steelworkers of America will be asking for more equity as it hammers out new contracts this year.

Here are the figures behind the growth of employee stock ownership plans since 1980, as estimated by the National Center for Employee Ownership.